1. What are Environmental Fiscal Reforms (EFRs)?
Markets are often incomplete for most environmental
goods and services because of the failure or
inability of institutions to establish well-defined
property rights. In fact, market failure is
considered to be one of the major economic
causes of environmental degradation. It occurs
when the existing market does not signal out
the correct price and that there is always
an under-valuation and hence an under-pricing – sometimes
even no price - of environmental goods and
services. Resources use will be inefficient
if there is not well development market and
individuals do not have to consider the full
social costs of their activities with respect
to resource use in the absence of well-defined
property rights. Further, resources will be
undervalued because reallocation of the resources
to higher use value becomes more costly and
not feasible if property rights are absent.
Market failure also involves environmental
externalities as certain actions of producers
or consumers have unintended external (indirect)
effects on other producers or/and consumers.
The typical example includes the classic case
of a smoking factory dirtying a nearby laundry’s
clothes.
Environmental fiscal reforms (EFRs) is one
of the most important policy instruments
to correct these failures by rationalizing
tax structures, inter-governmental fiscal
transfer for achieving outcome in pro-poor
environmental management, efficient use of
tax sources, cost recovery and removing environmentally
harmful subsidies. Depending on its design
and implementation, EFRs can generate benefits
in terms of fiscal revenue, environmental
conservation and poverty reduction. They
entail introduction or application of a range
of taxation and pricing measures. These include:
•
taxes on natural resources extraction (like
water and forest products);
•
removal of environmentally damaging subsidies
(perverse incentives);
•
introduction of specific product taxes, levies
and user and pollution charges; and
•
reforming other taxes in favour of environment.
2. What is the rationale of introducing
EFRs in Pakistan?
There are strong reasons and a pressing need
to introduce EFRs in Pakistan. For example;
•
Achieving poverty reduction strategies is
a major objective of GOP but this is often
constrained due to intense pressure on natural
resources (declining water quality and quantity,
depleted forests, pastures, polluted air).
•
There is a focus on general fiscal reform,
but it is marred by challenges and issues
such as avoidance and evasion, multiplicity
of taxes, and inadequate implementation.
•
Despite this, the country is in a transition
towards some sort of fiscal decentralization
and the local governments need avenues for
levying special taxes to raise revenues.
•
Revenue from the special levies can be allocated
to pro-poor and natural resources regeneration
expenditures in the budget.
•
This will provide opportunity for improved
pricing of natural resources and goods with
environmental externalities that benefit
the poor.
•
Above all, it will help reduce poverty.
3. How do EFRs help reduce poverty?
EFRs can contribute significantly towards
poverty reduction – and more effective
environmental management - by:
•
freeing up financial resources for pro-poor
investments;
•
raising revenues while protecting the environment;
•
enabling to adopt a comprehensive poverty
reduction strategy and sectoral development
plans;
•
having a wide range of applications such
as natural resources management, air, water,
solid waste, energy usage etc. contributing
directly (to the revenues); and
•
being a fiscal instrument for correcting
market failures.
4. What are some of the viable fiscal instruments
for EFRs in Pakistan?
Following were some of the EFR options that
have been identified during a background
study conducted for this project. These options
have been chosen to maximize positive outcomes,
and to lead to win-win situations across
the board. In addition to other potential
EFR instruments to be identified through
field research, the project will especially
consider the options on the left hand side
of the following list.
•
Fuel pricing - Solid waste user charges
•
Motor vehicle excise duty - Water user charges
•
Electricity collection charges - Abiana charges
•
National park entrance fees - Tube well electricity
subsidies
•
Timber concessions fees - Deep sea fishing
license fees and catch
levies for foreign vessels
•
Trophy hunting fees - Shrimp farming subsidies
- Industrial effluent treatment charges
5. What are the main components (and major
activities) of this project?
5.1 Action research and awareness raising
•
Identify key fiscal instruments and their
linkages to environmental and financial benefits.
•
Willingness to pay (WTP) assessment for improved
environmental services, and communicating
the results of these to decision-makers and
service providers
•
Assessment of the institutional, legal and
policy opportunities and constraints to the
adoption of EFR options at the local level
•
Working papers on specifically identified
thematic areas for EFR and their potential
impacts on overall development and linkages
with larger policy framework of the country
•
Awareness raising efforts through assessments
that illustrate how EFR options contribute
to increased financial revenues, poverty
reduction and environmental improvement at
the local level
5.2 Capacity building
•
Building capacity of local partners to implement
pilot initiatives on fiscal issues such as
the creation of systems for tax base measurement,
assessment techniques and collection methodologies
through coaching, mentoring and learning-by-doing
with specialists hired for this purpose
•
Building capacity of local government to
set in place the enabling framework for the
implementation of EFR by identifying potential
areas of training/ and or capacity building
needs for operation-level training to implement
demo schemes
5.3 Enabling institutional, legal and policy
framework
•
Building support and partnerships at the
local level to build constituency for broad-based
acceptance and interest in EFR, and support
for developing human resources as well as
to validate the findings of the research
studies
•
Broad-based consultation with more influential
actors like the World Bank and DFID who are
currently undertaking a dialogue with the
Government of Pakistan on the reform process
5.4 EFR demonstration schemes
•
Implementation of pilot activities based
on the field research to influence policy
change for possible scaling-up EFR work in
the future
5.5 Dissemination of lessons learned for
wider replication
•
Documenting EFR lessons by various advocacy
material and events to disseminate the project
experiences as an instrument in building
wider support for replication
6. What are the implementation mechanisms?
The project will undertake EFR related activities
at federal, provincial and local levels.
While the project will engage with the
federal and provincial levels to build
support for EFR - and address challenges
over fiscal powers and the enabling conditions
for fiscal decentralization - the district
level work will be more on implementation
of EFR instruments as well as the pilot
schemes. As the fiscal decentralization
reform process presents key pathways to
the adoption and implementation EFR options,
the testing ground of the project is therefore
at the district level. Abbottabad, which
has already developed an Integrated Development
Vision in a participatory manner – and
has a great potential for anchoring the
EFR initiative as well as piloting EFR
projects –is the chosen district.
7. What is the duration of the project?
Three years - from May 2006 to April 2009.
Contact Information:
Dr. Bhim Adhikari
IUCN Pakistan,
Country Office,
1 Bath Island Road,
Karachi 75530
Tel: 021- 5861540-3
Fax: 021- 583 8106
Email: cro@iucnp.org
Copyright © 1995-2004
International Union for Conservation of Nature and Natural Resources,
Pakistan. All rights reserved
